How much do fees pinch institutional equity performance?

Staff | January 11, 2019

In the active versus passive investment debate, manager fees play a major role, but how much do they really impact returns?

According to the S&P indices’ latest scorecard on how fees affect investing, one-year returns were positive for active equity institutional managers, with those in 11 out of 17 categories outperforming their respective benchmarks, gross of fees. However, when the horizon was lengthened to 10 years, managers underperformed their benchmarks in 10 out 17 categories.

Large-cap value was the standout equity category, on both a net- and a gross-of-fee basis. On a 10-year basis, close to 87 per cent of active managers in the category outperformed the benchmark, gross of fees. Two-thirds (75 per cent) of institutional accounts also outperformed the benchmark over a 10-year period, net of fees.

The report also included comparisons of retail mutual fund returns, taking their different fees into account, to demonstrate a more complete picture of the return landscape. It noted that, similar to previous years, more mutual fund managers underperformed on all equity categories in 2017 than their institutional counterparts on a net-of-fee basis.

Over the past 10 years, within large-cap equities, 89.5 per cent of mutual fund managers underperformed, net of fees, compared with only 58.7 per cent of institutional accounts. Gross of fees, 71.97 per cent of large-cap mutual funds and 40.17 per cent of institutional accounts underperformed.

Mid-caps showed a similar difference between the two investor profiles. With mid-cap equities, 96.4 per cent of mutual funds underperformed the S&P MidCap 400 index, net of fees, while 78.57 per cent of institutional accounts did the same.

In small-caps, more institutional accounts (81.6 per cent) underperformed the S&P SmallCap 600 than mutual funds (80 per cent), net of funds, over the past 10 years. “The findings in the small-cap space help to dispel the myth that small-cap equity is an inefficient asset class that is best accessed via active management,” the report noted.